BFRI Biofrontera Inc

Notes to the Financial Statements

(Unaudited)

1. Business Overview

We are a U.S.-based biopharmaceutical company specializing in the commercialization of pharmaceutical products for the treatment of dermatological conditions, in particular, diseases caused primarily by exposure to sunlight that results in sun damage to the skin. Our principal licensed products focus on the treatment of actinic keratoses, which are skin lesions that can sometimes lead to skin cancer. We also market a licensed topical antibiotic for treatment of impetigo, a bacterial skin infection.

Our principal product is Ameluz^®, which is a prescription drug approved for use in combination with our licensor’s medical device, which has been approved by the U.S. Food and Drug Administration (“FDA”), the BF-RhodoLED^® lamp, for photodynamic therapy in the U.S. for the lesion-directed and field-directed treatment of actinic keratosis of mild-to-moderate severity on the face and scalp. We are currently selling Ameluz^® for this indication in the U.S. under an exclusive license and supply agreement (“Ameluz LSA”) with Biofrontera Pharma GmbH (“Pharma”) dated as of October 1, 2016, as subsequently amended on June 16, 2021 and further amended on October 8, 2021. Under the Ameluz LSA, we hold the exclusive license to sell Ameluz^® and BF-RhodoLED^® for all indications currently approved by the FDA as well as all future FDA-approved indications.

Our second prescription drug product is Xepi^® (ozenoxacin cream, 1%), a topical non-fluorinated quinolone that inhibits bacterial growth. Currently, no antibiotic resistance against Xepi^® is known and it has been specifically approved by the FDA for the treatment of impetigo due to staphylococcus aureus or streptococcus pyogenes. The approved indication is impetigo, a common skin infection. It is approved for use in adults and children 2 months and older. We are currently selling Xepi^® for this indication in the U.S. under an exclusive license and supply agreement (“Xepi LSA”) with Ferrer Internacional S.A. (“Ferrer”) that was acquired by Biofrontera Inc. on March 25, 2019 through our acquisition of Cutanea Life Sciences, Inc. (“Cutanea”). Refer to Note 14, Related Party Transactions, for further details.

Liquidity and Going Concern

We devote a substantial portion of our cash resources to the commercialization of our licensed products, Ameluz®, BF-RhodoLED® and Xepi®. We have historically financed our operating and capital expenditures through cash proceeds generated from our product sales and proceeds received in connection with the Intercompany Revolving Loan Agreement with our parent, Biofrontera AG. On December 31, 2020, the Company agreed to convert the outstanding principal balance of the revolving debt in the amount of $47.0 million into an aggregate of 7,999,000 shares of common stock at a purchase price of $5.875 per share, which was based on our internal assessment and agreement with our parent, for an aggregate gross capital contribution of $47.0 million.

Since inception, we have incurred losses and generated negative cash flows from operations. As of December 31, 2020, we had an accumulated deficit of $41.2 million and cash and cash equivalents of $8.1 million. As of September 30, 2021, we had an accumulated deficit of $64.4 million, which is inclusive of a legal settlement liability of $11.25 million – see Legal Proceedings section in Note 19 for further details, and cash and cash equivalents of $1.7 million.

We expect to continue to generate revenue from product sales. We also expect to continue to incur operating losses from significant sales and marketing efforts in the U.S as we seek to expand the commercialization of Ameluz® and Xepi^®. In addition, we expect to incur additional expenses to add and improve operational, financial and information systems and personnel, including personnel to support our product commercialization efforts. We also expect to incur additional costs to continue to comply with corporate governance, internal controls and similar requirements applicable to us as a public company in the U.S.

Our future growth is dependent on our ability to obtain equity or debt financing. On March 31, 2021, we entered into the Second Intercompany Revolving Loan Agreement with Biofrontera AG for $20.0 million of committed sources of funds for a two-year term.

On November 2, 2021, we completed an initial public offering (“IPO”) and issued and sold 3,600,000 units (“Units”), each consisting of (i) one share of common stock of the Company, par value $0.001 per share (the “Shares”) and (ii) one warrant of the Company (the “Warrants”) entitling the holder to purchase one Share at an exercise price of $5.00 per Share. In addition, the underwriters exercised in full their option to purchase up to an additional 540,000 Warrants to cover over-allotments. The Units were sold at a price of $5.00 per Unit, and the Company estimates the net proceeds from the IPO to be $15.4 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company.

On November 24 and November 26, 2021, investors exercised their warrants to purchase a total of 854,000 shares of common stock at an exercise price of $5.00 per share, resulting in estimated net proceeds of $3.9 million after deducting underwriting discounts and commission.

On November 29, 2021, we entered into a securities purchase agreement with a single institutional investor for the purchase of 2,857,143 shares of our common stock (or common stock equivalents in lieu thereof) and warrants to purchase up to an aggregate of 2,857,143 shares of common stock, in a private placement. The combined purchase price for one share of common stock (or common stock equivalent) and a warrant to purchase one share of common stock is $5.25. The warrants have an exercise price of $5.25 per share, will be immediately exercisable, and will expire five years from the issuance date. The gross proceeds from the private placement offering are expected to be approximately $15.0 million. The private offering is expected to close on or about December 1, 2021, subject to the satisfaction of customary closing conditions.

With the funds available under the Second Intercompany Revolving Loan Agreement, the net proceeds from the IPO, and the proceeds from the private placement offering, we will have sufficient funds to support the operating, investing, and financing activities of the Company through at least twelve months from the date of the issuance of the interim financial statements.

2. Summary of Significant Accounting Policies

Basis for Preparation of the Financial Statements

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. The balance sheet as of December 31, 2020 was derived from the Company’s audited financial statements. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2020, included in the Company’s final prospectus for the Company’s initial public offering, as filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, on November 1, 2021 (“Final Prospectus”). In the opinion of management, the interim unaudited condensed financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position for the periods presented. The results for the interim periods presented are not necessarily indicative of future results.

The financial statements are presented in U.S. dollars (“USD”) or thousands of USD.

The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies within the notes to financial statements for the year ended December 31, 2020, included in the Company’s Final Prospectus. There have been no significant changes to these policies during the nine months ended September 30, 2021, except as noted below.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), amending accounting guidance to simplify the accounting for income taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendments also clarify and simplify other aspects of the accounting for income taxes. The Company adopted ASU 2019-12 on January 1, 2021. The adoption did not have a material impact on the Company’s financial statements and disclosures for the nine months ended September 30, 2021.

Recently Issued Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases with lease terms of more than twelve months and recognition, presentation and measurement in the financial statements will depend on the lease classification as a finance or operating lease. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The JOBS ACT provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows us to delay the adoption of this new standard until it would otherwise apply to private companies. The new standard will be effective for us for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of adopting this guidance.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity’s current estimate of credit losses expected to be incurred. The new standard will be effective for us on January 1, 2023. The Company is currently evaluating the impact of adopting this guidance.

3. Acquisition Contract Liabilities

On March 25, 2019, we entered into an agreement (as amended, the “Share Purchase Agreement”) with Maruho Co, Ltd. (“Maruho”) to acquire 100% of the shares of Cutanea Life Sciences, Inc. (“Cutanea”). As of the date of the acquisition, Maruho Co, Ltd. owned approximately 29.9% of our parent, Biofrontera AG through its fully owned subsidiary Maruho Deutschland GmbH.

The acquisition of Cutanea has enabled us to market Xepi^®, an FDA-approved drug that had been introduced in the US market in November 2018. 

After the date of acquisition, we were entitled to restructure the business of Cutanea and be reimbursed by Maruho for these restructuring costs. These restructuring costs Maruho agreed to pay are referred to as “SPA Costs” under the arrangement and are to be accounted for as other income in the period the amounts are determined in accordance with ASC 810. Refer to Note 15, Restructuring costs, for further detail.

Pursuant to the Share Purchase Agreement, Maruho agreed to provide $7.3 million in start-up cost financing for Cutanea’s redesigned business activities (“start-up costs”). These start-up costs are to be paid back to Maruho by the end of 2023 in accordance with contractual obligations related to an earn-out arrangement. In addition, as part of the earn-out arrangement with Maruho, the product profit amount from the sale of Cutanea products as defined in the share purchase agreement will be shared equally between Maruho and Biofrontera until 2030 (“contingent consideration”).

In connection with this acquisition, we recorded: (i) a $4.6 million intangible asset related to the Xepi^® license refer, (Refer to Note 9, Intangible Asset, net, for further detail) (ii) a $1.7 million contract asset related to the benefit associated with the non-interest bearing start-up cost financing, (iii) $6.5 million of contingent consideration related to the estimated profits from the sale of Cutanea products to be shared equally with Maruho, (iv) a bargain purchase gain of $5.7 million due to the excess fair value of the net assets acquired over the cash consideration transferred, as well as (v) a favorable lease asset of $69,000 related to the leased properties. The total fair value of the consideration expected to be transferred from the Company to Maruho was the one US dollar purchase price and $6.5 million of contingent consideration related to the earn-out.

The contract asset related to the start-up cost financing is amortized on a straight-line basis using a 6.0% interest rate over the 57-month term of the financing arrangement, which ends on December 31, 2023. The start-up cost financing was determined to represent interest free financing arranged for the benefit of the Company and, as such, was excluded from the purchase consideration. The contract asset is shown net of the related start-up cost financing within acquisition contract liabilities, net.

The contingent consideration was recorded at acquisition-date fair value using a Monte Carlo simulation with an assumed discount rate of 6.0% over the applicable term. The contingent consideration is recorded within acquisition contract liabilities, net. The amount of contingent consideration that could be payable is not subject to a cap under the agreement. The Company re-measures contingent consideration and re-assesses the underlying assumptions and estimates at each reporting period.

Acquisition contract liabilities, net consist of the following:

 Schedule of Acquisition Contact Liabilities

Contingent consideration, which relates to the estimated profits from the sale of Cutanea products to be shared equally with Maruho, is reflected at fair value within acquisition contract liabilities, net on the balance sheets. The fair value is based on significant inputs not observable in the market, which represent a Level 3 measurement within the fair value hierarchy. The valuation of the contingent consideration utilizes a Monte Carlo simulation model, which incorporates the following key assumptions and estimates: (i) the product profit amount to be shared equally with Maruho, (ii) remaining contractual term, (iii) risk discount rate, and (iv) payment discount rate of 6.0%. The Company re-measures contingent consideration and re-assesses the underlying assumptions and estimates at each reporting period.

The following table provides a roll forward of the fair value of the contingent consideration:

The change in fair value of the contingent consideration is recorded in operating expenses in the statements of operations. The fair value of the contingent consideration increased $0.7 million and $1.7 million for the three and nine months ended September 30, 2021, respectively. The fair value of the contingent consideration increased $0.1 million and $0.2 million for the three and nine months ended September 30, 2020, respectively.

4. Revenue

We generate revenue primarily through the sales of our products Ameluz^®, BF-RhodoLED^® lamps and Xepi^®. Revenue from the sales of our BF-RhodoLED^® lamp and Xepi^® are relatively insignificant compared with the revenues generated through our sales of Ameluz^®.

We generated $4.3 million and $14.6 million of Ameluz^® revenue, de minimus amounts of Xepi^® revenue and $73,000 and $0.3 million of BF-RhodoLED^® lamps revenue during the three and nine months ended September 30, 2021, respectively.

During the three and nine months ended September 30, 2020, we generated $3.1 million and $9.7 million of Ameluz^® revenue, $54,000 and $0.2 million of Xepi^® revenue, and $86,000 and $0.3 million of BF-RhodoLED^® lamps.

Related party revenue relates to an agreement with Biofrontera Bioscience GmbH (“Bioscience”) for BF-RhodoLED^® leasing and installation service. Refer to Note 14, Related Party Transactions.

An analysis of the changes in product revenue allowances and reserves is summarized as follows:

5. Accounts Receivable, net

Accounts receivable are mainly attributable to the sale of Ameluz^®, the BF-RhodoLED^® and Xepi^®. It is expected that all trade receivables will be settled within twelve months of the balance sheet date.

The allowance for doubtful accounts was $9,000 and $40,000 as of September 30,2021 and December 31, 2020, respectively.

6. Inventories

Inventories are comprised of Ameluz^®, Xepi^® and the BF-RhodoLED^® finished products.

In assessing the consumption of inventories, the sequence of consumption is assumed to be based on the first-in-first-out (FIFO) method. During the three and nine months ended September 30, 2021, we recorded a $(3,000) and $31,000 provision, respectively, for Xepi^® inventory obsolescence. During the three and nine months ended September 30, 2020, we recorded a $0.4 million and $0.4 million provision, respectively, for Xepi^® inventory obsolescence due to product expiring.

7. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 Schedule of Prepaid Expenses and Other Current Assets

8. Property and Equipment, Net

Property and equipment, net consists of the following:

 Schedule of Property and Equipment

Depreciation expense is included in selling, general and administrative expense on the statements of operations. Depreciation expense was $29,000 and $95,000 for the three and nine months ended September 30, 2021, respectively. Depreciation expense was $36,000 and $109,000 for the three and nine months ended September 30, 2020, respectively.

9. Intangible Asset, Net

Intangible asset, net consists of the following:

 Schedule of Intangible Asset Net

The Xepi^® license intangible asset was recorded at acquisition-date fair value of $4.6 million and is amortized on a straight-line basis over the useful life of 11 years. Amortization expense is included in selling, general and administrative expense on the statements of operations. Amortization expense for the three and nine months ended September 30, 2021 was $0.1 million and $0.3 million, respectively. Amortization expense for the three and nine months ended September 30, 2020 was $0.1 million and $0.3 million, respectively. The expected annual amortization expense for the next five years from 2021 to 2025 is $0.4 million each year.

We review the Xepi^® license intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. As of March 31, 2020, given the impact to the global economy, as well as the Company’s operations, from the COVID-19 pandemic, the Company determined an interim impairment analysis was warranted for the Xepi^® license acquired in the Cutanea business combination. The Company evaluated the Xepi^® license for impairment using an undiscounted cash flow analysis and determined no impairment charge was necessary.

The Company did not recognize any intangible asset impairment charges during the three and nine months ended September 30, 2021 or 2020.

10. Statement of Cash Flows

The following table provides a reconciliation of cash, cash equivalents, and restricted cash that sum to the total shown in the statements of cash flows:

11. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 Schedule of Accrued Expenses and Other Current Liabilities

12. Other Long-Term Liabilities

Other long-term liabilities consist of the following:

Schedule of Other Long Term Liabilities

13. Income Taxes

As part of Congress’s response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into United States law on March 27, 2020 and modifies certain provisions of the Tax Cuts and Jobs Act, enacted in 2017, with respect to net operating losses. Under the CARES Act, the limitation on the deduction of net operating losses to 80% of annual taxable income is suspended for taxable years beginning before January 1, 2021. The CARES Act did not have a material impact on the financial statements due to our full valuation allowance position.

As a result of the net losses we have incurred since inception, we have recorded no provision for federal income taxes during such periods. Income tax expense incurred for the three and nine months ended September 30, 2021 and 2020 relates to state income taxes.

At September 30, 2021 and December 31, 2020, the Company had no unrecognized tax benefits.

Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying statements of operations. As of September 30,2021, and December 31, 2020, the Company has no accrued interest related to uncertain tax positions. Since the Company is in a loss carryforward position, it is generally subject to examination by the U.S. federal, state, and local income tax authorities for all tax years in which a loss carryforward is available.

14. Related Party Transactions

License and Supply Agreement

On July 15, 2016, the Company executed an exclusive license and supply agreement with Pharma, which was amended in July 2019 to increase the Ameluz transfer price per unit from 35.0% to 50.0% of the anticipated net selling price per unit as defined in the agreement. Under the agreement, the Company obtained an exclusive, non-transferable license to use the Pharma’s technology to market and sell the licensed products, Ameluz^® and BF-RhodoLED^® and must purchase the licensed products exclusively from Pharma. There was no consideration paid for the transfer of the license. Refer to Note 21 Subsequent Events, for amendment to license and supply agreement dated October 8, 2021.

Purchases of the licensed products during the three and nine months ended September 30, 2021 were $1.0 million and $5.7 million respectively, and recorded in inventories in the balance sheets, and, when sold, in cost of revenues, related party in the statements of operations. Purchases of the licensed products during the three and nine months ended September 30, 2020 were $0.3 million and $5.6 million. Amounts due and payable to Pharma as of September 30, 2021 and December 31, 2020 were $1.3 million, which were recorded in accounts payable, related parties in the balance sheets.

Loan Agreement

On June 19, 2015, the Company entered into a 6% interest bearing revolving loan agreement with Biofrontera AG, the Company’s parent. Interest was accrued and paid quarterly over the life of the loan. As of September 30, 2021 and December 31,2020, there was no loan principal balance outstanding. There was no interest expense recognized for the three or nine months ended September 30, 2021. Interest expense for the three and nine months ended September 30, 2020 was $0.7 million and $1.9 million, respectively.

On December 31, 2020, the Company agreed to convert the outstanding principal balance of the revolving debt of $47.0 million into an aggregate of 7,999,000 shares of common stock at a price of $5.875 per share, for an aggregate gross capital contribution of $47.0 million.

On March 31, 2021, the Company entered into the Second Intercompany Revolving Loan Agreement with Biofrontera AG for $20.0 million of committed sources of funds. The revolving loan bears an annual interest rate of 6.0% and will terminate on the second anniversary of the date of this loan agreement, March 31, 2023 (the “termination date”). The outstanding principal and interest balance of all advances shall be due and payable on the termination date. In the event of a change in control of the Company at any point prior to the termination date, Biofrontera AG’s obligation to make advances to the Company shall be discharged immediately upon the effective date of the change of control; and all outstanding obligations of the Company must be paid back in full within twelve months of the effective date of the change of control. Biofrontera AG may require the Company to pay all outstanding obligations at any time on or after the date that is ten calendar days following the closing of a transaction that reduces the voting rights of the Company in Biofrontera AG to less than 100%. As of September 30, 2021, the Company has not drawn upon the Second Intercompany Revolving Loan Agreement.

Service Agreements

On January 1, 2016, the Company executed an intercompany service agreement with Biofrontera AG. Under the agreement, the Company receives services which include accounting consolidation, information technology support, and pharmacovigilance services.

On July 2, 2021, we entered into a new intercompany services agreement (“2021 Services Agreement”) which provides for the execution of statements of work that will supersede the applicable provisions of the 2016 Services Agreement. The 2021 Services Agreement enables us to continue relying on Biofrontera AG and its subsidiaries for various services it has historically provided to us, including information technology and pharmacovigilance support. Under the 2021 Services Agreement we have agreed that the applicable provisions related to reimbursement and allocation of expenses in the 2016 Services Agreement will remain in effect until we execute a statement of work under the 2021 Services Agreement that supersedes such provisions. Expenses related to the service agreement were $0.2 million and $0.5 million for the three and nine months ended September 30, 2021, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, which were recorded in selling, general and administrative, related party. Management asserts that these expenses represent a reasonable allocation from Biofrontera AG. Amounts due to Biofrontera AG related to the service agreement were $0.3 million and $0.3 million as of September 30, 2021 and December 31, 2020, respectively, which were recorded in accounts payable, related parties in the balance sheets.

Clinical Lamp Lease Agreement

On August 1, 2018, the Company executed a clinical lamp lease agreement with Bioscience to provide lamps and associated services.

Total revenue related to the clinical lamp lease agreements was approximately $15,000 and $16,000 for the three months ended September 30, 2021 and 2020, respectively and recorded as revenues, related party. Total revenue related to the clinical lamp lease agreements was approximately $42,000 and $47,000 for the nine months ended September 30, 2021 and 2020, respectively. Amounts due from Bioscience for clinical lamp and reimbursement were approximately $37,000 and $73,000 as of September 30, 2021 and December 31, 2020, respectively, which were recorded as accounts receivable, related parties in the balance sheets.

Reimbursements from Maruho Related to Cutanea Acquisition

Pursuant to the Cutanea Share Purchase Agreement, we received start-up cost financing and reimbursements for certain SPA costs. Refer to Note 3 - Acquisition Contract Liabilities.

For the nine months ended September 30, 2020, the Company received start-up cost financing from Maruho in the amount of $3.4 million, which was recorded as acquisition contract liabilities, net in the balance sheets. No start-up cost financing was received during the nine months ended September 30, 2021.

The amounts reimbursed relating to SPA costs were recorded as other income in the statements of operations as the related expenses were recorded. For the three and nine months ended September 30, 2021, the reimbursed amounts recognized relating to SPA costs were $0.2 million and $0.5 million. For the three and nine months ended September 30, 2020, the amounts reimbursed relating to SPA costs were $0.2 million and $0.7 million, respectively.

Amounts due from Maruho were $3,000 as of September 30, 2021 and were recorded in accounts receivable, related parties in the balance sheets. There were no amounts due to Maruho at December 31, 2020.

Other

The Company receives expense reimbursement from Biofrontera AG and Bioscience on quarterly basis for costs incurred on behalf of these entities, which are netted against expenses incurred within selling, general and administrative expenses. Total expense reimbursements were $0.2 million and $0.7 million for the three and nine months ended September 30, 2021, respectively. Total expense reimbursements for the three and nine months ended September 30, 2020 were $0.2 million and $0.6 million, respectively

On August 27, 2020, the Company received $1.5 million from Pharma to support the Company’s marketing efforts. For the three and nine months ended September 30, 2020, the Company recorded $0.1 million as a reduction of selling, general and administrative costs in the statement of operations to offset the $0.1 million of specific, incremental, identifiable marketing costs incurred to support the sales of Ameluz and of BF-RhodoLED and $1.1 million as a reduction of cost of revenue, related party. The remaining $0.3 million was recorded as a deferred liability as of September 30, 2020, with the expectation of additional marketing costs to be incurred in the fourth quarter.

15. Restructuring costs

We restructured the business of Cutanea and incurred restructuring costs which were subsequently reimbursed by Maruho. Restructuring costs primarily relate to Aktipak^® discontinuation, personnel costs related to the termination all Cutanea employees, and the winding down of Cutanea’s operations. For the three and nine months ended September 30, 2021, restructuring costs were incurred in the amount of $0.2 million and $0.7 million, respectively. For the three and nine months ended September 30, 2020, restructuring costs were incurred in the amount of $0.2 million and $0.9 million, respectively

As of September 30, 2021, the Company does not expect to incur additional product discontinuation or personnel costs. As of September 30, 2021, the remaining amount the Company expects to incur related to facility exit costs is $0.1 million. The expected completion date of the remaining facility exit activities is in the fourth quarter of 2021.

16. Interest Expense, net

Interest expense, net consists of the following:

 Schedule of Interest Expense

Related party interest expense consists of interest expenses incurred under our Revolving Loan Agreement with Biofrontera AG.

Contract asset interest expense relates to the $1.7 million contract asset in connection with the $7.3 million start-up cost financing received from Maruho under the Cutanea acquisition share purchase agreement. The contract asset is amortized on a straight-line basis using a 6% interest rate over the financing arrangement contract term, which ends on December 31, 2023.

17. Other Income (Expense), net

Other income (expense), net consists of the following:

  Schedule of Other Income (Expenses)

Other, net, primarily includes gain (loss) on foreign currency transactions and gain on termination of operating leases.

18. Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders is calculated as follows (in thousands, except share and per share amounts):

19. Commitment and Contingencies

Facility Leases

The Company leases its corporate headquarters under an operating lease that expires in November 2025. The Company provided the landlord with a security deposit in the amount of $0.1 million, which was recorded as other assets in the balance sheets.

In connection with the acquisition of Cutanea, the Company inherited various property leases in Pennsylvania, which were non-cancellable. All Cutanea property leases are operating leases and will end in 2021. A security deposit in the amount of $0.1 million was recorded as prepaid expenses and other current assets at December 31, 2020 and September 30, 2021.

Rent expense is recorded on a straight-line basis through the end of the lease term. Certain Cutanea office space is subleased to other tenants. The Company incurred rent expense, net of sublease income, in the amount of $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, which was included in selling, general, and administrative expenses and restructuring costs. The rent expense, net of sublease income, for the three and nine months ended September 30, 2020 was $0.2 million and $0.8 million, respectively.

Auto Leases

The Company also leases autos for its field sales force with a lease payment term of 40 months. The Company incurred auto lease expense of $0.1 million and $0.4 million for the three and nine months ended September 30, 2021, respectively. Auto lease expense for the three and nine months ended September 30, 2020 was $0.1 million and $0.4 million, respectively.

The minimum aggregate payments of all future lease commitments, net of future sublease income, at September 30, 2021, are as follows:

Cutanea earnout payments

We are obligated to repay to Maruho $3.6 million on December 31, 2022 and $3.7 million on December 31, 2023 for start-up cost financing paid to us in connection with the Cutanea acquisition.

We are also obligated to share product profits with Maruho equally from January 1, 2020 through October 30, 2030. Refer to Note 3, Acquisition Contract Liabilities.

Milestone payments with Ferrer Internacional S.A.

Under the Xepi LSA, we are obligated to make payments to Ferrer upon the occurrence of certain milestones. Specifically, we must pay Ferrer i) $2,000,000 upon the first occasion when annual net sales of Xepi^® under the Xepi LSA exceed $25,000,000, and ii) $4,000,000 upon the first occasion annual net sales of Xepi^® under the Xepi LSA exceed $50,000,000. No payments were made related to Xepi^® milestones for the three and nine months ended September 30, 2021, or 2020. As of September 30, 2021, we were unable to estimate the timing or likelihood of achieving these milestones.

Legal proceedings

At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of FASB ASC Topic 450, Contingencies. The Company expenses as incurred the costs related to such legal proceedings. We are a named party to a lawsuit filed March 23, 2018 in the United States District Court for the District of Massachusetts in which we are alleged to have infringed on certain patents and misappropriated certain trade secrets. Prior to the closing of the IPO, Biofrontera AG shall be responsible for 100% of the legal fees, costs and expenses related to this matter. After the closing of the IPO Biofrontera AG and the Company agreed to share the related legal costs at a rate of 69% and 31%, respectively.

On November 29, 2021, the Company entered into a settlement and release agreement with the respect to the above mentioned litigation. In the settlement, the Company and Biofrontera AG together agreed to make an aggregate payment of $22.5 million to settle the claims in the litigation. The Company will be responsible for $11.25 million of the aggregate settlement amount, plus interest accrued at a rate equal to the weekly average 1-year constant maturity Treasury yield, and agreed to pay in three installments, as follows:

As of September 30, 2021, we recorded a legal settlement liability in the amount of $11.25 million.

20. Retirement Plan

The Company has a defined-contribution plan under Section 401(k) of Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company matches 50% of employee contributions up to a maximum of 6% of employees’ salary.

During the three and nine months ended September 30, 2021, matching contribution costs paid by the Company were $59,000 and $0.2 million, respectively. For the three and nine months ended September 30, 2020, matching contribution costs paid by the Company were $31,000 and $0.2 million.

21. Subsequent Events

The Company has evaluated events or transactions that occurred after September 30, 2021 for potential recognition or disclosure through November 30, 2021, which is the date these interim financial statements were available to be issued.

On October 1, 2021 we entered into an amended employment agreement with Professor Hermann Lübbert, Ph.D. that will become effective upon (i) the consummation of the offering and (ii) the earlier of either of the following occurrences: (a) the date on which Biofrontera AG is first deemed not to control us under German law or (b) the day after his last day of employment with Biofrontera AG. The agreement provides that Prof. Dr. Lübbert will serve as our Executive Chairman and, as long as he remains Chief Executive Officer of Biofrontera AG, devotes 30% of his working capacity to his responsibilities as Executive Chairman and 70% to his responsibilities to Biofrontera AG. If his employment with Biofrontera AG is terminated, he may devote a larger percentage of his working capacity (up to 100%) to the performance of his duties as Executive Chairman, subject to the approval and consent of our board of directors. During the period following the consummation of the Offering that the amended employment agreement is not effective, we will reimburse Biofrontera AG for a portion of his salary to be agreed between us and Biofrontera AG. The agreement also addresses the possible scenario in which Prof. Dr. Lübbert resigns from his position at Biofrontera AG and devotes 100% of his time to his role as Executive Chairman. Upon his resignation from Biofrontera AG, Prof Dr. Lübbert will receive a salary to be determined and approved by our board of directors at that time, which will be commensurate with the scope of his responsibilities and appropriate with respect to the Company’s financial situation. We also agree to allow Prof. Dr. Lübbert to participate in any benefit programs we make available to our employees Prof. Dr. Lübbert is further eligible to receive an annual target performance bonus of up to 100% of his base salary at the time, based on certain annual corporate goals and individual performance goals established annually by our board of directors. No bonus will be paid if our board of directors determines that the target achievement of the respective year was below 70%.

On October 8, 2021, we entered into a Corrected Amendment to Amended and Restated License and Supply Agreement for Ameluz to change the purchase price we will pay per unit to Pharma for Ameluz® from 50.0% to an amount to be based on our sales history:

-      50% of the anticipated net price per unit until we generate $30 million in revenue from sales of the products we license from Pharma during a given Commercial Year (as defined in the Ameluz LSA);

-      40% of the anticipated net price per unit for all revenues we generate between $30 million and $50 million from sales of the products we license from Pharma; and

-      30% of the anticipated net price per unit for all revenues we generate above $50 million from sales of the products we license from Pharma.

The amendment to the Ameluz LSA also entitles us to take over clinical trial and regulatory work under certain circumstances with respect to the indications that Biofrontera AG and its consolidated subsidiaries, Pharma, Bioscience, Biofrontera Neuroscience GmbH, and Biofrontera Development GmbH (collectively, the “Biofrontera Group”) is currently seeking from the FDA (as well as certain other studies identified in the Corrected Amendment to the Ameluz LSA), most of which are described in the Final Prospectus in the section titled “—Our Licensors’ Research and Development Programs—Current Clinical Trials for Ameluz® for the U.S. Market” and subtract the cost of the trials from the transfer price of Ameluz®, but it does not grant that right with respect to any indications that might be pursued in the future.

On November 2, 2021, we consummated our IPO of 3,600,000 Units each consisting of (i) one share of common stock of the Company, par value $0.001 per share and (ii) one warrant of the Company entitling the holder to purchase one Share at an exercise price of $5.00 per Share. The Warrants are immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The Shares and Warrants were issued separately in the offering and may be transferred separately immediately upon issuance. The underwriters exercised in full their option to purchase up to an additional 540,000 Warrants to cover over-allotments. The Units were sold at a price of $5.00 per Unit, and the Company estimates the net proceeds from the IPO to be $15.4 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. In connection with the IPO, the Company issued to the underwriters Unit Purchase Options to purchase, in the aggregate, (a) 108,000 Units and (b) an additional 16,200 Warrants (relating to the underwriters’ exercise of the over-allotment option in full, with respect to the Warrants).

In connection with the consummation of the IPO, on November 2, 2021, Erica Monaco resigned her position on the board of directors of the Company and John J. Borer, Beth J. Hoffman, Ph.D, and Loretta M. Wedge, CPA, CCGMA (collectively, the “Directors”) were appointed to the board of directors of the Company (the “Board”). The Board has determined that each of Dr. Hoffman and Ms. Wedge are independent directors within the meaning of applicable SEC and Nasdaq rules. Effective November 2, 2021, each of the Directors was appointed to the Board’s Audit Committee, the Board’s Nominating and Corporate Governance Committee and the Board’s Compensation Committee.

On November 2, 2021, the Company filed an Amended and Restated Certificate of Incorporation (the “Amended and Restated Certificate”) with the Secretary of State of the State of Delaware in connection with the IPO. The amendment allowed for a classified board and the issuance of preferred stock. The Board and sole existing stockholder previously approved the Amended and Restated Certificate to be effective upon the consummation of the IPO.

On November 24 and November 26, 2021, investors exercised their warrants to purchase a total of 854,000 shares of common stock at an exercise price of $5.00 per share, resulting in estimated net proceeds of $3.9 million after deducting underwriting discounts and commission.

On November 29, 2021, the Company entered into a settlement and release agreement with respect to the previously mentioned litigation. Refer to Legal Proceedings section in Note 19 for further details.

On November 29, 2021, the Company entered into a securities purchase agreement with a single institutional investor for the purchase of 2,857,143 shares of its common stock (or common stock equivalents in lieu thereof) and warrants to purchase up to an aggregate of 2,857,143 shares of common stock, in a private placement. The combined purchase price for one share of common stock (or common stock equivalent) and a warrant to purchase one share of common stock is $5.25. The warrants have an exercise price of $5.25 per share, will be immediately exercisable, and will expire five years from the issuance date. The gross proceeds from the private placement offering are expected to be approximately $15.0 million. The private offering is expected to close on or about December 1, 2021, subject to the satisfaction of customary closing conditions.